Paths to full employment

The world is looking at Germany in admiration. People are calling what is happening in the country the “German miracle” or the “German job miracle”. Most people’s seemingly utopian dream of full employment could become reality in just a few years. Thanks to the Marshall Plan and social market economy, Germany rose like a phoenix from the ashes of World War II. Then came the “economic miracle”. Later, following reunification, the country looked like “the sick man of Europe”, but in the years since then it has developed into the muscleman of Europe.

Admired by many, imitated by others and eyed enviously or warily by some, Germany has evolved into the gravitational centre of Europe around which everything revolves nowadays, similar to a century ago. At the same time, it is the macroeconomic model student that has become an example for many other countries.

Germany’s success figures are indeed impressive. This applies both to the levels and the dynamics of the macroeconomic indicators. Germany produces around one fifth of the European Union’s gross domestic product (GDP). Over the past two years Germany’s economic output grew by 6.8% in real terms, that’s about twice as much as the average in the euro area as a whole (3.4%). Germany’s national debt decreased last year. In all other euro area countries (except for Estonia) it has increased. A comparison of employment statistics is even more impressive. In Germany the (standardized) unemployment rate sank from 7.1% in 2010 to 5.8% in 2011. In France it remained at the far higher level of 9.8%, in Italy it fell only slightly from 8.4% to 8.1%, and in Britain it remained unchanged at 7.8%.

Never before did more Germans have jobs

The development of employment rates in Germany over the past few years cannot be compared with earlier downswing phases or with the far more unfavourable developments in the majority of industrialized countries. Although overall economic production only gradually returned to the pre-crisis level of early 2008, the situation in the labour market has improved.

Despite the euro crisis and worldwide recession fears, in 2011 an annual average of just 2,976,000 people were registered as unemployed, 263,000 less than in the previous year. In the years since reunification, there have never been less people without work in Germany, and never before did more Germans have jobs. Until recently, one would not have dared to dream of such success. The employment trend is surprising because it is taking place despite the globalization that pessimists always feared would lead to jobs being shifted to low-wage countries. What is more, this success is proving possible even though structural change has been progressing at an accelerated rate, which made numerous sceptics talk about an “end to work”. However, this hasn’t happened. South Asian workers haven’t replaced skilled German workers, they have complemented them. And machines haven’t replaced human beings either; they have simply made them more efficient.

The “German job miracle” has many causes. At the microeconomic level, German companies are extremely competitive inter­nationally, and in this respect there is again a difference to the rest of Europe. At the macroeconomic level, the European single market has given German companies the opportunity to exploit its microeconomic superiority throughout Europe. Last year Germany exported goods worth more than a trillion euros for the first time. The positive developments in sales and thus in the employment situation are correspondingly robust.

The decisive factor in international competi­tiveness is the worldwide technological leadership of several German companies, especially many small and medium-sized companies. Germany has remained an industrialized country, in contrast to say the UK or Ireland, which have placed an emphasis on services and capital markets. This doesn’t imply that Germany has abandoned services. Nevertheless, the core emphasis is still on industrial value-added output, and this is complemented by industrial services and software.

Together, industrial hardware and industry-related software create a perfect symbiosis which comes more in the form of cleverly designed process chains than in the form of products. This helps to ensure stable employment conditions, even under difficult economic conditions. The pronounced wage restraint on the part of workforces and the resulting increased attractiveness of unit labour costs compared with those of competitors have made a crucial contribution in this respect.

A partial contribution towards stabilizing employment was also made by the government-supported short-time work programme during the recession of 2008/2009. In addition to this, capacity-aligned flexitime accounts were also used allowing for overtime to be worked in good times and giving compensatory time off on low capacity days. This shows that employers are more conscious now than in earlier downswing phases of how dependent they are on the knowledge and specific expert skills of their employees.

Hartz reforms have change many things

But it is especially the Hartz reforms carried out by the Red-Green coalition government of Gerhard Schröder (1998 to 2005) that changed more in the mindsets of Germans than people generally assume. The reforms have strengthened the desire and willingness to escape unemployment and return to work as rapidly as possible. The motto of “providing support and making demands” has now become an accepted reality. Flexibility towards work alliance agreements and the willingness of workforces to refrain from excessive wage demands in exchange for job security guarantees are now normal.

All in all, Germany has changed enormously over the past twelve years, more so than the rest of Europe. It has knuckled down to the structural reforms and modernization measures that all of the other countries in the euro area still have ahead of them. ▪

Professor Thomas Straubhaar is Director of the Hamburg Institute of International Economics (HWWI) and Professor of Economics at the Univer­sity of Hamburg.